By Julie Patel
A new study by a consumer group in New York claims insurers manufactured problems at some points the past few decades to pump up profits.
The report, released this month by Americans for Insurance Reform, a project of New York Law School’s Center for Justice and Democracy, starts with this premise: The time between when insurers collect premiums and pay claims is so long that they mainly make money by investing premiums during the lag time.
The report says it's a myth that the industry needs premiums to outpace claims and other expenses. That only happened during seven years in the past 44 years, according to A.M. Best data cited by the report.
During that period, insurers’ surplus – or claims-paying reserves – from one year to the next decreased just eight times.
The report examined three periods of low and high rates for the insurance industry, and said the cycles go something like this:
Insurers compete fiercely for business by lowering rates when interest rates are high and the stock market does well. That way they can make money by investing the premiums they collect. The report said this happens more for insurance coverage that businesses buy: Home and auto insurance “is not as competitive because of the lack of knowledge of consumers.”
Then, interest rates drop , investments don't do as well, and insurers “manufacture” reasons to raise rates, with high legal costs being a favorite excuse, according to the report. During periods of higher rates that started in the mid-1970s and mid-1980s, insurers argued “the only way to bring down insurance rates was to make it more difficult for injured consumers to sue in court.”
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